Silver Jumps Higher On Portugal Debt Concerns … And China Plans To Buy Eurobonds, Deepening Europe’s Debt Woes

Silver Jumps Higher On Portugal Debt Concerns … And China Plans To Buy Eurobonds, Deepening Europe’s Debt Woes

Financial market report for January 11, 2011
I … Silver jumps higher on rising concern Portugal many need a bailout.
Silver, SLV, jumped 2.1% as Tony C. Dreibus and Pham-Duy Nguyen of Bloomberg report: “Europe’s debt crisis is spreading, boosting demand for the precious metals as a store of value. Palladium jumped the most in seven weeks. Portuguese bond yields may be rising to levels that force the nation to follow Greece and Ireland in requesting a bailout from the European Union and the Interntional Monetary Fund to avert default.”
II … China plans to buy Eurobonds, deepening Europe’s debt woes
Reuters Business Day reports in article Japan To Buy Euro Debt, Portugal Resists Bailout: China’s Yu Yongding, an influential economist in the Chinese Academy of Social Sciences, a government think-tank said: “Whether we should buy the European stability fund or national debt is different. I think it’s much safer if we buy the fund as it has a Triple-A rating.”
Just because the debt is rated Triple-A, does not make it money good.
The financial crisis had its origins in the fact that the subprime bonds, MBB, had a AAA rating. After these mortgage backed bonds, MBB, went bad, and threatened to undermine banks world wide, Ben Bernanke created the TARP Facility of Quantitative Easing I, which took these and other distressed in, and traded out money good US Treasury Bonds.
Many banks turned these funds back in to the Fed and now reside as Excess Reserves at the Fed.
When Ben Bernanke announce Quantitative Easing II in August 2010 at Jackson Hole, bond vigilantes declared the Federal Reserve’s plan as monetization of debt. This created risk for holders of US Treasuries. As a result the 30 10 Sovereign Debt Yield Curve, $TYX:$TNX, flattened, and investors rapidly sold out of the longer maturity debt, such as the 30 Year US Government Bond, EDV, and the 10 to 20 Year US Government Bonds, TLT. If one uses TLT as a value of Excess Reserves, MSN Finance chart suggests that there has been a 13% loss of value in securities residing In Excess Reserves since September 1, 2010 and January 10, 2011
The interesting thing is the value of the assets taken in, is that they have grown in value, due to US Dollar moneyness caused by currency traders buying the US Dollar, $USD, and selling the major currencies, DBV, and the emerging market currencies, CEW during November and December 2010. If one uses FAGIX as a value of the Distressed Investments, MSN Finance chart suggests that there has been a 9% gain of value in securities residing on the Feds Balance Sheet since September 1, 2010 and January 10, 2011.
Allison Fitzgerald in December 18, 2008 article Bloomberg article Fed Loans Guided by Raters Grading Subprime Debt AAA reports Federal Reserve Chairman Ben S Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities.
The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by “major nationally recognized statistical ratings organizations” (that, in effect, means Moody’s Investors Service, Standard & Poor’s and Fitch Ratings).
It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp  which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.
The emergency loans are “consistent with the central bank’s traditional role as the liquidity provider of last resort,” he said.

Former executives of the three major raters told a House Oversight and Government Reform Committee hearing Oct. 22 that they had relied on outdated models to maximize profits. Originators of mortgage-backed and asset-backed securities and collateralized debt obligations “typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality,” From 2002 to 2007, Moody’s and S&P provided top ratings on debt pools that included $3.2 trillion of loans to homebuyers with low credit scores and undocumented incomes, according to data compiled by Bloomberg. As subprime borrowers defaulted, the companies downgraded more than three-quarters of the structured investment securities known as CDOs that had been rated AAA. Writedowns and losses on that debt incurred by banks, brokers, insurers and Fannie Mae and Freddie Mac totaled $997.1 billion worldwide, Bloomberg data show. The central bank wants to stabilize financial markets and mitigate the effects of the recession, as well as “support the functioning of credit markets,” Bernanke said Dec. 1 in a speech in Austin, Texas. He didn’t address the credit rating system.

So today we have history repeating itself. We have not only a bank, but now a major central bank buying what amounts to a CDO that is supposedly money good because it has triple AAA rating.  

Christine Seib in April 9, 2010 TimesOnline article Citigroup Executives Admit Regret But No Blame For Role In Financial Crisis reports: Appearing today in front of a Financial Crisis Inquiry Commission (FCIC) hearing, though, they did not admit responsibility for helping to cause the disaster. They instead blamed credit ratings agencies, regulators, mortgage lenders, low interest rates and over-leveraged banks. Citigroup was one of the worst casualties of the crisis, in which the bank was forced to write down more than $100 billion of credit-related assets. Citigroup survived the crisis after a $45 billion bailout from US taxpayers.

In issuing the the Eurobonds, the European Financial Stability Facility, EFSF, is monetizing the sovereign debt of fiscally responsible nations such as Germany, and thus destroying their debt sovereignty effectively creating a Eurozone debt union, where “the debt of one becomes the debt of all”, creating moral hazard on a continental wide scale. Furthermore the EFSF is conducting a coup, voiding the national sovereignty of all Eurozone nations. In issuing E-Bonds, it is giving seigniorage to debt, and thus is establishing the Eurozone as a region of global governance, one of ten called for by the Club of Rome in 1974.   

The funds that the EFSF will be deploying establish a transfer union that violates the no bail out clause of Treaty Law.

Buying eurobonds makes the eurozone debt crisis worse by draining away buyers from the government sovereign debt market.

III … Portuguese Central Bank Director says external aid “will be inevitable”.
OpenEurope in Press Summary of January 11, 2011 reports: The European Central Bank stepped up its purchase of Portuguese ten-year bonds yesterday. Reuters reports that yields on Portuguese ten-year bonds remain above 7% despite the ECB’s intervention, a level widely considered unsustainable. The FT quotes Gary Jenkins, head of fixed income at Evolution Securities, noting that “it took Greece 16 days and Ireland 20 days to request EU/IMF aid after their ten-year yields breached the 7% level.” According to UniCredit economist Marco Valli, a bailout package for Portugal could total around €60bn.

The front page of Portuguese paper Público carries the headline: “Preparations for IMF aid to Portugal have already begun.” Lusa reports that Portuguese Central Bank Governor Carlos Costa insisted yesterday that “the Portuguese solve their problems and are able to solve their problems on their own.” However, Teodora Cardoso, a member of the Board of Directors of the Portuguese Central Bank, is quoted in Jornal de Notícias arguing, given the situation of the markets, external aid “will be inevitable”. The FT argues, “It is impossible to know how long the [Portuguese] government will resist the inevitable, although China ’s apparent willingness to become Portugal ’s sugar daddy suggests later rather than sooner.”

The Telegraph reports that Belgian King Albert II has asked caretaker ministers to push through a special austerity budget to reassure markets against the threat of contagion after the latest round of talks to form a coalition government broke down.

Meanwhile, an article in the Times notes that US money market funds have cut back their dealings with the eurozone’s financial services sector, EUFN, amid fears that the sovereign debt crisis could infect the region’s banking system. The WSJ reports that the Obama administration considers the eurozone debt crisis, rather than the overhaul of the international monetary system, as the most pressing issue to be addressed by French President Nicolas Sarkozy’s stewardship of the G20.

Lusa Jornal de Notícias WSJ WSJ 2 Telegraph Guardian Mail Irish Times Irish Times 2 Times Euractiv Le Figaro Independent AFP AFP 2 Reuters Euractiv France  Les Echos City AM FT FT 2 FT 3 FT 4 FT 5 FT 6 FT7  IHT IHT 2 El Pais Público Diário Económico Jornal de Notícias: editorial BBC: Hewitt WSJ: Hannon WSJ: Barley FT: Butler FT: editorial El Pais: Colombani El Pais: Crespo Diário Económico blog: Batista Diário Económico blog: Amaral

IV … Riots shake Tunisia and Algeria as officials implement austerity cuts amidst inflation in the price of food.   

Alex Lantier of Global Research reports Police repression of mass protests in Tunisia and Algeria last week has led to the deaths of over a dozen people, with hundreds injured. There was rioting against food price increases and state subsidy cuts across Algeria, amid ongoing demonstrations in Tunisia against unemployment and the regime of Tunisian President Zine El Abidine Ben Ali.


V … The charts of stocks appear to be to be topped out or topping out BEFORE earning reports come in.

Silver Mining, SIL, 3.6 on Silver, SLV, 2.1

Gold Mining, GDX, 2.0 on Gold, GLD, 0.6

Basic Materials, IYM, 1.2

Coal, KOL, 2.4

Metal Manufacturing, XME, 2.9%

Uranium Mining, URA, 1.1%

Energy Services, OIH, and Transocean, RIG, 3.2 on a higher price of oil, $WTIC, 1.7%

Dow Jones Oil And Gas Services, IEZ, 2.2, and National Oilwell Varco, NOV, 1.8%

Copper Mining, COPX, 1.2

Automobile Parts: AutoLiv, ALV, 1.7

Automobile Parts: Ceradyne, CRDN, -5.5

Automobile Parts: Magna International, MGA, -1.7

Automobile Parts:, TRW, 0.3

Automobile Parts; Goodyear, GT, -2.0 manifesting a dark cloud cover at the top of an ascending wedge; this is a Morgan Stanley Cyclicals Index Component.

Paper: Buckeye Technologies, BKI, -9.6

Small Cap Energy Shares, XLES, +1.7

Steel, SLX, 2.2

Nuclear, NLR, 1.2

Semiconductors, XSD, 0.1; these have risen parabolically and show a lollipop hanging man candlestick   

Sandisk, SDNK, -2.0 manifested bearish engulfing at the top of an ascending wedge.

Network shares, IGN, 0.5 shows a doji at the top of an ascending wedge

Nasdaq Internet, PNQI 0.5

Internet, HHH, -0.2

Dow Jones Internet, FDN, 0.1 shows a spinning top

Solar, TAN, shows a lollipop on the top of parabolic rise as these have risen higher with semiconductors

Wind Energy, FAN

Health Care, IHF, shows a doji at the top of a parabolic rise; these define the moneyness that has come on a dollar liquidity trade on a perceived but not sustainable flight to safety from sovereign crisis.

Retail, XRT, manifested bearish engulfing portending a fall lower. These and the gold mining stocks, GDX, the junior gold mining stocks, GDXJ, the exploratory silver mining companies such as Silver Standard Resources, SSRI, as well as Utilities, XLU, are leading the way down.

Transportation, IYT, -0.6% manifested bearsish engulfing

Transportation, Ryder, R, manifested bearish engulfing (this is a Morgan Stanley Cyclicals Index Component)

Consumer Discretionary, XLYS, these fell 0.6 having manifested an Elliott Wave 3 Down.

Small Cap Pure Value, RZV, 0.2; these have strongly sold off and cannot go past their January 3, 2011 high

Gaming, BJK, +0.6%, manifesting a darken doji.

Telecommunications, VOX, -0.9 manifested bearish engulfing

Home Building, ITB, 1.7, manifesting a hammer

Nasdaq Clean Energy, QCLN, 0.5 manifested a darkened doji.

Nanotechnology, PXN, 1.0 rose to what may be an Elliott Wave 2 high; once these start to fall, they will be fast fallers.   

Banks, KBE, 0.5; the chart shows that these have already started to fall lower.

Financial, XLF, 0.4

US Financial Services, IYG, 0.2

Timber Products, WOOD, 0.9 manifesting a hammer.

Asset Management, STWD, 1.0 rose to resistance

Small Cap Information Technology, XLKS, manifested what may be an evening star, but this will take a day to confirm.

Airlines, FAA, -1.2 manifested bearish engulfing.

Airline, United Airlines, UAL -1.5 manifested bearish engulfing


Nikolaj Gammeltoft of Bloomberg reports Short Selling Against S&P 500 Drops to One-Year Low, Exchange Data Show. Bets against the Standard & Poor’s 500 Index fell to a one-year low as short sellers reduced speculation that technology and telephone stocks such as Adobe Inc. and CenturyLink Inc. will decline. Short interest on the S&P 500 dropped to 6.87 billion shares, or 3.9 percent of shares available for trading, as of Dec. 31, down 5.7 percent from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg. It was the third straight period that S&P 500 short selling fell. For technology companies, it slid 8.1 percent to 1.26 billion shares, and it fell 16 percent to 368.4 million for phone stocks.


VI. Summary and investment application

China’s economist Yu Yongding gave seigniorage to the EFSF Monetary Authority’s sovereign bonds by stating “Whether we should buy the European stability fund or national debt is different. I think it’s much safer if we buy the fund as it has a Triple-A rating.” Today, an international leader spoke and created credit. Mr Yu Yongding created moneyness; that is he made the E-bonds money good.


The sovereign debt crisis will only get worse … And then out of Götterdämmerung, an investment flame out, a European Chancellor, will arise to establish order. The Sovereign will be one who has credentials, such as that of having been awarded the Charlemagne Prize. Candidates for the EU Leadership include Herman van Rompuy, Angela Merkel or John Redwood or Tony Blair


And a Banker, that is a Seignior, such as Wolfgang Schäuble, or Olli Rehn, or Jean-Claude Trichet, or Gordon Brown or Jose Manuel Barroso, or Giulio Tremonti or Jean-Claude Juncker or Nicolas Sarkozy or Christine Lagarde will rise to provide credit. The Seignior’s word will be like that of Mr. Yu Yongding, providing both seigniorage and money good to investment vehicles he deems worthy.


Gold mining stocks have once again disconnected from the price of gold, as can be seen in the chart of GDX:GLD. Gold mining stocks have always been and always will be a swing trade; today was a strong swing trade in the gold mining stocks, nothing more and nothing less. Holding gold stocks will not preserve one’s wealth.  


The HUI Precious Metal Mining Stocks, ^HUI, generally make turns lower with US Treasury Bonds, $USB, as is seen in the chart of $HUI:$USB.


I encourage that one invest in and take personal possession of gold bullion, $GOLD as it is the sovereign currency: it maintains its value in terms of national currencies as can be seen in the chart of gold relative to the Australian Dollar: GLD:FXA.


Stocks are headed down as the chart of the small cap value shares relative to the small cap growth shares RSV:RZG, suggests that currency deflation, that is debt deflation, has again returned to the financial market place just as it did in April when the currency traders sold the major currencies and the emerging market currencies against the US Dollar with the onset of the sovereign debt crisis.


It may, or it may not be, that the US Dollar will be sold at this time. The chart of the US Dollar, $USD, shows a close at 80.85; it could easily go into sideways consolidation before falling lower with the currencies as sovereign debt crisis spread across the globe. The bond vigilantes have the upper hand, and it will be their choice of which sovereign interest rate to call higher. The 30 Year US Government Bond, EDV, traded unchanged today as did world government bonds, BWX.


2 Responses to “Silver Jumps Higher On Portugal Debt Concerns … And China Plans To Buy Eurobonds, Deepening Europe’s Debt Woes”

  1. James Says:

    I agree with swing trading gold stocks, which I do routinely. I like the juniors/midteir gold/copper miners NSU, NGD, & GRS.

  2. Tyson F. Gautreaux Says:

    Very useful article, I will follow your blog frequently.

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